Petra guides investors to diamond life as miner still unearthing treasure at Cullinan

Owning a diamond mine sounds like a licence to print money, but that hasn’t always been the prevailing wisdom.

When a consortium led by Petra Diamonds bought the fabled Cullinan mine from industry titan De Beers in 2008, some in the industry thought it had overpaid.

Petra’s share of the original deal was about £23million, giving it 37 per cent of the mine. Just 18 months later, with the mine’s economics proven, it paid another £84million to double its stake. Today, those sums look like small change.

Precious: White diamond weighing 507.55 carats which was excavated at the historic Cullinan mine in 2009

The latest discovery from Cullinan – famed for its gigantic stones – is a 232-carat white diamond. The price tag for the rough stone won’t be known until it is sold because prices per carat vary depending on colour and clarity.

But it would be no surprise to see the latest discovery take its place among a growing list of multi- million-pound sales. Petra’s shares gained nearly 9 per cent – or £78million.

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It sold the 507-carat Cullinan Heritage in 2009 to Hong Kong jewellery company Chow Tai Fook for an eye-watering £22million.
More recently it sold a 29.6-carat blue diamond for £16million.
Its most recent major discovery – a 122.5 carat blue diamond – is currently on sale in South Africa. The sale process closes this Friday and analysts are expecting another sale in the double-digit millions.

Including much smaller stones, revenue for 2014 reached £293million, up on last year’s £250million, suggesting an improvement on last year’s operating profit of £76million when full-year results come out later this month.

Viewed in that light, the Cullinan purchase looks like the sale of the century. Petra believes Cullinan holds another 200m carats and could be mined for the next 50 years. That would give this rich piece of real estate a remarkable lifespan of more than 150 years, stretching back to 1903.

Cullinan churned out huge stones from the very beginning. In 1905 it produced the world’s largest ever gem-quality diamond, at some 3107 carats, about the weight of six apples.
So large was the rock that it was carved into nine separate gems.

The two largest, the Great Star of Africa and the Second Star of Africa, ended up among the most impressive parts of the crown jewels.

These days, diamond mining is not a prestige exercise by a colonial power, but a matter of hard-nosed business.
And Petra has been doing rather well at it.

The company was brought to London’s junior AIM market in 1997 by miner Adonis Poroulis, then just 27 years old.
On listing its market capitalisation was just £10million. Yesterday it was closing in on £1billion.

Petra has increased its production from 200,000 carats a year before the Cullinan deal to nearly 2.7million, with plans to reach 5million in 2019.

It is sometimes said that diamond miners are stealing a living, because the gems are not nearly as rare as the industry likes to pretend.

There is some truth in that given that global production last year was about 130million carats, enough to make a generous engagement ring for every woman in Britain more than four times over. But output is declining.

Last year’s production represents a decline of nearly a third on the 177million carats in 2005.
And discoveries of new diamond deposits, which occur in geological formations called kimberlite ‘pipes’, are rare.

Perhaps unsurprisingly, Petra isn’t forecasting a collapse in the diamond price any time soon.
‘Demand is forecast to outpace supply, resulting in the emergence of a significant rough diamond supply deficit,’ it says.

And not only is supply constrained but demand is growing thanks to urbanisation in emerging markets, creating a growing class of enriched and aspirational new buyers. So who is getting rich?

At the moment the two largest shareholders are two Saudi Arabian groups, 13 per cent shareholder Al Rajhi and Saad Investments with just under 12 per cent.

Directors hold 2 per cent, with founder Poroulis holding about 1 per cent alone, worth nearly £10million. Shareholders have seen a 350 per cent increase in the value of their holdings in the past five years and are due to start receiving a dividend in 2016. But the miners who extract this vast wealth are also expecting a windfall.

When Petra bought Cullinan, it funded the purchase of 26 per cent of the mine on behalf of a South African Black Economic Empowerment (BEE) group. These organisations try to redress the economic imbalance, a legacy of the Apartheid era.

But the BEE group, which includes Cullinan miners, won’t get the money just yet.
All of Petra’s cashflow currently goes towards expansion and the BEE won’t get any of it until 2018 under current plans.
They will be hoping that, some ten years after Petra bought Cullinan, the cash machine starts paying out to them too.